niveshak may 11

8/6/2019 Niveshak May 11

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THE INVESTOR VOLUME 4 ISSUE 5 May 2011

OSAMA

SENSEX

SCAMSwill euro be saved or doomed PG.06 Are we debt worthy? PG.12


2/20Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bearsno responsibility whatsoever.

F R O M E D I T O R S D E S K

NiveshakVolume IV

ISSUE V

May 2011

Faculty Mentor

Prof. N. Sivasankaran

Editor

Rajat Sethia

Sub-Editors

Alok Agrawal

Deep Mehta

Jayant Kejriwal

Mrityunjay Choudhary

Sawan Singamsetty

Shashank Jain

Tejas Vijay Pradhan

Creative Team

Vishal Goel

Vivek Priyadarshi

All images, design and artworkare copyright of

IIM Shillong Finance Club

Finance Club

Indian Institute of Management

Shillong

www.iims-niveshak.com

Dear Niveshaks,

The dull and mixed result season has come to an end amidst a monthwhich saw results of five assembly elections, RBI raising interest rates by50 basis points and the petrol prices being increased by Rs. 5 per litre. Theincrease in petrol price, which the oil firms had been holding since Janu-ary even though crude oil had touched a two-and-a-half-year high, camea day after election results of five state assemblies were announced. This isthe eighth hike in petrol price since the June 2010 decision of deregulatingthe petrol price. The rate increase by RBI which was more than expectedcaused both stock and bond markets to decline on fears of lesser than ex-pected growth in GDP due to tough interest rate scenario. The headlineinflation has eased a bit in April due to lower manufacturing prices butthe prospect of rising energy costs will keep pressure on the RBI to raiserates going ahead. The wholesale price index, the countrys main inflationgauge, rose an annual 8.66 percent in April, above the median forecast of8.48 percent rise. However, the softening of inflation seems temporary as

the hike in diesel and LPG is likely to be announced by the OMCs in thecoming weeks to reduce their under-recoveries.

The stock markets which posted smart gains in March 2011 on expec-tations of good Q4 FY11 results, slid down recently due to disappointingcorporate earnings results, rising inflation and the most recent one beingthe RBIs aggressive rate hike with a view to curb inflation. The fall in themarkets was exacerbated by the continued FII selling due to concerns overthe impact of the rate hikes on the overall growth. The RBI move to hikerates by 50 bps is a departure from its calibrated approach in recent timesand should help in taming inflationary pressures. This move which is ex-pected to put some pressure on the GDP for FY12 could cause some nearterm pain to the markets due to the concerns over slowdown in growth.

However, the proactive move was warranted considering the spiralling in-flation in India. Events which could have a bearing on inflation would bethe monsoon forecast and the end of the quantitative easing (QE2) in Junewhich could see a dollar rebound and consequent cool off in commodityprices.

This issue brings to you some more interesting and insightful topics.The cover story this month focuses on the big news of this month thedeath of Osama and its impact on financial world in general. The article ofthe month explores the history of worlds second strongest currency Euro ,what went wrong with it and how the wrongs can be corrected. Anotherarticle in this issue focuses on the importance of SHGs and their role inBanking the Unbanked in the country . The issue also features an article

on the current state of Indian debt market and the way it can improve go-ing in the future for corporates to be able to use it effectively to raise fundsquickly and fuel their growth. Lastly, the Classroom this month explains thetopic of ETFs.

Hope you find the issue an interesting read.

Stay invested.

Rajat Sethia(Editor -Niveshak)

THE TEAM


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C O N T E N T S

Niveshak Times04The Month That Was

PERSPECTIVE

16 SHG Model or microfnance

Cover Story9 OSAMA, SENSEX &SCAMS

Article of the month

06 Will Euro be Saved orDoomed?

FINLOUNGE

18Fin-Q

finsight

12 Are we debt worthy?

Classroom

17 Exchange Traded Funds


4/20NIVESHAK VOLUME 4 ISSUE 5 May 2011

RBI ups the ante against ination

In an unexpected move RBIincreased the repo rate by

50 basis points to 7.25%in an aggressive moveto tame inflation. Themove indicates RBIs in-tent to sacrifice growth

for reining in on inflationwhich the RBI felt would

r e - main at an elevated levelof 9 per cent in the first half of the current finan-cial year before moderating to 6 per cent by March,2012. The market which was expecting a 25 ba-sis points hike reacted negatively to the hawkishstance of RBI with SENSEX plunging 463 points onthe day of announcement of the upward rate revi-sion. The next day five major banks including PNB,OBC and Yes Bank followed suit increasing their

respective interest rates by half percentage pointsmaking all loans costlier. By the end of week ICICIand Union Bank also hiked their interest rates by50 basis points. However RBI provided some reliefto small savers as it increased the saving rate to4% from 3.5% now.

Top management at Infosys undergoes a

change

V e t e r a nbanker, KVK a m a t htook overas posi-tion of chairman of Infosys from com- panysfounder Narayana Murthy. The appointment ofnew chairman was followed by two more changes-S D Shibulal currently the company CFO has beenappointed CEO and MD while the incumbent S Go-palkrishnan was promoted to the post of executiveco-chairman. Murthy has been made the chairman

emeritus, a non executive chairman as a token ofrespect for his invaluable contribution towards theorganization.

Brand Godrej valued at $3 billion

Godrej, furniture topersonal careproducts masterbrand has beenvalued at $3 b i l - l ion(around Rs.13,000 crore) as part ofthe brand valuation exercise undertaken by the114-year-old Godrej Group for the first time. Godrejhad hired UK-based brand consultancy firm, Inter-brand, for valuing the master brand along with thesub-brands in the group.

Microsoft expands its internet space with

Skyp acquisition

Microsoft and Skyphave reached anagreement centralto which is the

acquisition ofpopular webcalling serviceby Microsoft for $8.5 billion. Skypewill become a Microsoft business unitand Skype CEO Tony Bates will be president of theMicrosoft Skype Division. The acquisition being fi-nanced by Microsofts huge cash pile is companyslargest, surpassing the purchase of AQuantive forabout $6 billion in 2007. Microsoft will connectSkype to its Outlook e-mail, Xbox game console,Windows mobile phones and corporate-phonesoftware. The acquisition is an attempt on the partof Microsoft to attract more web users and narrowGoogles lead in Web advertising.

Cabinet nod to FDI in LLP

The Cabinet Committee on Economic Affairs (CCEA)allowed foreign direct investment (FDI) in limitedliability partnership (LLP) firms. CCEA suggesteda calibrated approach towards implementation ofFDI in LLP beginning with the open sectors wheremonitoring is not required and would be subject tosome conditions. LLP is a hybrid form of partner-

The Niveshak Timeswww.iims-niveshak.com

IIM, Shillong

TEAM NIVESHAK

TheM

onThThaTW

as

BESIDES IMPROVING REVENUE COLLECTIONS THROUGH TAX REFORMS, STATES

SHOULD ALSO FOCUS ON THE EXPENDITURE MANAGEMENT


5/20FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 5

IT IS POSSIBLE TO MAINTAIN INFLATION AT REASONABLE LEVEL

ship in which each partner faces a limited liability.The provision of limited liability has been includedto provide encouragement to small business enti-ties to engage in larger ventures.

Apple surpasses Google as most valued

brand

A valuation report released by WPP Plc. MentionedApple as the most valued brand ahead of searchengine behemoth, Google. The introduction of I Pad

tablet and launch of new versions of iPhone andiMac catalyzed the almost doubling of companyssales and profit in last quarter. Apples brand value

surged 84% in past year to $153.3 billion.O n the other hand Googles

brand value decreased2% to $111.5 billion.

Export posts 34% growth in April

The beginning of financial year augured well for In-

dian export sector as it witnessed a rise of 34.4%.The engineering goods sector emerged as the topperformer registering a 109% growth and totalshipments were estimated at $6.8 billion. Export ofpetroleum products grew 53% to $4.3 billion andgems and jewellery exports rose 39% to $2.9 bil-lion. On the flip side, a few sectors such as iron oreand marine products showed a decline. There weremore worrying signal as imports increased 14.1%to $32.8 billion. The increase in imports left Indiawith a deficit of $8.9 billion in April.

HUL net proft down 2%

FMCG major Hindustan Unilever(HUL) posted a more than ex-pected 14% increase in sales to

Rs 4,899 crore-driven entirely byvolumes. HULs home and per-sonal Care business grew by

13.6%, while soaps and detergents grew at 11.4%during the quarter. The volume growth of 14%

which drove sales offset the increase in input coststo reflect a consistent improvement in the healthof the business. However, due to an extraordinaryitem in fourth quarter ended March 31, 2011, net

profit declined by 2% to Rs 569 crore.

Rajaratnam held guilty in insider trading

trial

The biggest insider trad-ing trial in the history ofSEC that had been goingon for past two monthscame to an anticipatedturn as the accused hedge

fund manager, Raj Raja-ratnam was found guiltyby Manhattan federal juryon all 14 conspiracy and securities fraud charges ofinsider trading. Galleon Group hedge fund foundercould face 15-1/2 to 19-1/2 years in a federal prisonunder sentencing guidelines. Defense teams per-sistent claim that Rajaratnams trades were guidedby a trove of research and public information, notsecrets leaked by highly-placed corporate insidersproved futile as the jury was in agreement with

the prosecutors who alleged that money managerplayed a central role in the most sweeping probeof insider trading at hedge funds on record.

Greece suffers another credit rating down-

grade

S&Ps cut Greeces credit rating further into junkterritory, reflecting growing doubts that the eurozones most fragile economy can manage its debtwithout imposing losses on private bondholders.

One year into an international bailout, Greece isstruggling with weak revenues and a deep reces-sion, fuelling speculation that even a more lenientrescue deal with the EU and IMF wont be enoughto pull it out of the fiscal mess.

The Niveshak Timeswww.iims-niveshak.com

TheM

onT

hThaTW

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NIVESHAK VOLUME 4 ISSUE 5 May 2011

The interest rate futures market lacks liquidity mainly because banks are allowed to use them

only for hedging exposures and not trading

FMS, New DelhiPRANAY SINGH

Euro was intro-

duced to challenge

and dethrone dol-

lar supremacy. The

common monetary

policy in the euro-

zone countries, and

an integrated capital

market with finan-

cial institutions was

the vision of euro

but despite all the

optimism it failed to

achieve its objective.

The current article

explores how the

Euro was formed

and what went

wrong with it.

EARLY BEGINNINGS, EARLY

PROBLEMS

Differences between member

states were already very large adecade ago when Euro was intro-

duced. The euro became the com-mon currency of very wide plethora

of countries which were both Da-

vids and Goliaths of economic world. On one hand there were wealthy

countries like Germany and Nether-lands while other end of spectrum

had countries like Greece and Por-tugal. It also became the currency

of innovative and flexible marketof Finland and also of Italy which

lacked both.

In 1999, the difference in low-

est and highest inflation figures be-tween the euro-zone countries was

two percentage points. The differ-ence had almost tripled, to 5.9 per-centage points at the end of 2009.

Also for the newly established

European Central Bank (ECB), whichhad to determine the appropriate

interest rate for all members so as

to propose a one size fits all policy.But with the passage of time and

increasing differences among eurocountries the ECBs policy changed

to be described as one size fitsnone.

THE FORMING YEARS OF CRISIS

The common monetary policyin the euro-zone countries, and an

integrated capital market with fi-

nancial institutions was the vision

The refrain of award winning

song in 1990 Together: 1992 wasUnite, unite Europe. Shortly there-

after European Union was formed

by Treaty of Maastricht in 1993. Thenext wave of unification came in

1998 when European Central bankwas formed and in 1999 when Euro

was adopted as common currencyof European Union. With introduc-

tion of euro it was proposed andhoped that it will be a efficient

tool to narrow and erase out the

economic differences between themembers countries of the European

Union. The euro was meant to be amonetary union, but not a political

one. It was established for achiev-ing the aim of that the differences

in wealth, would diminish as well inthe member states.

The participating states es-tablished a common central bank,

but they explicitly refused to ad-here to a common authority and

common rule for taxation. But alsoat the time of Euros creation, many

worried about its long-run viability.

And as we can see that after thecommon currencys first decade,

increased divergence, rather than

rapid convergence, has become thenorm within the euro area, and ten-sions can be expected to increase

further. So what went wrong witha common currency which was in-

troduced to challenge and dethrone

dollar supremacy in the financialsystems?



AoM

The Bond market has been

plagued by lack of participa-

tion and skewed nature owing

to prohibition on short-selling

of euro but despite all the optimism it failed to

achieve its objective.

The second problem was the smallness of theEUs budget relative to those of the member states.

The vast part of government activity took place on

a national level. But different governments had dif-

ferent degrees of fiscal policy and measures.Italian, Greek, or Portuguese public debt be-

came high. But Ireland, with previously modest

deficit and debt levels, also suddenly and unex-pectedly faced the same kind of issue, owing to

the governments need to take over private debtfrom the banking sector. France and Germany had

an inherently strong fiscal position.

The Greek government turned out to be a liar.

In 2004, Greece admitted that it had lied about thesize of its deficit ever since 2000 which were pre-

cisely the years used to assess Greeces applicationto join the euro zone.

THE TRAGEDY COMES CALLING

Today Italy and Greece face serious debt is-sues amid financial market concerns about the

possibility of default or their leaving the euro zone.The gaps between German bond yields and Greek

yields are currently reaching at record levels . The

price of default insurance has tripled.

At 14% of GDP, Greeces latest fiscal deficit is

the largest of the euro-zone countries after Cyprus.Its debt-to-GDP ratio stood at 113% by the end of

2009.

The imminent risk is that Greece will not beable to find the 53 billion it needs to service its

debt falling due in 2010 the estimated additional30 billion to finance the new debt resulting from

its projected budget deficit. The Greek disaster was

made possible because its government deceived itsEuropean partners for years with faked statistics.

The Euro zone is currently wrestling with fis-cal imbalance and sovereign debt risk and fiscally

fragmented and only partly unified politically.

Ireland grew in part due to large credit in-flows into its Banking Real Estate Complex. The

Irish banking systems external borrowing reachedroughly 100% of GDP. When the world economy

dove in 2008-2009, Irelands dived deeper.

POSSIBLE AFTER EFFECTS

The fear of contagion and failure can spread

over Europe. Greece can be the potential first dom-ino to fall in a scenario that can result in a situation

which can unfold the Greek austerity measures donot suffice, the debt crisis deepens, and the risk

of a sovereign default spreads to other Europeaneconomies. As the Greek domino falls, countries

like Portugal, Spain, or Italy will start to tumble,

and a small economys crisis can turn into a majorEuropean calamity.

The sovereign debt crisis might hit the real

economy, with Europe ending up in a vicious circleof even higher deficits, lower growth rates, explod-

ing unemployment, and decreasing competitive-

ness.

THE IMMEDIATE SOLUTIONS

The rescue packages were put together on

May 8-9 in Brussels. European created a EuropeanFinancial Stability Facility (EFSF). A special purpose

vehicle (SPV) has been established in Luxembourg,and can already count on hundreds of billions of

Euros in guarantees from member states. There is80 billion program already agreed for Greece, the

European Union countries agreed on a 500 bil-

lion credit line for other distressed countries. TheInternational Monetary Fund added a further 280

billionAND EURO CAN BE SAVED

The ECB can and will become scapegoat for

failing of Euro. If it keeps its interest rate too lowfor too long, countries like Germany and the Neth-

erlands will protest and are protesting. If it hikesthe interest rate, the southern euro-zone countries

like Italy will complain. In that case, support for the

euro, already fragile, will erode further, weaken-ing the common currency and fuelling even greater

tensions. So what are the possible solutions thatcan save Euro?

Possibly creation of a common EuropeanTransfer Union for the benefit of the deficit coun-

tries, including Portugal, Spain, Ireland and Italywith funds for this purpose provided by European

Union can be a help.

The second option is also a viable one i.e.


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Greece going through a depression, and simultane-

ously reducing its wages and prices of commodi-

ties. Finally, Greece can leave the euro and accord-ing to its economic situation devalue its currency

accordingly.

But in the end Europe will have to realize that

the most promising for all is to implement the in-stitutional reforms, including the necessary fiscal

framework that should have been in place whenthe euro was launched.

The basic flaw is that a member of the euro

zone cannot be expelled under current rules, al-

lowing countries like Greece to lie, manipulate,blackmail, and collect more and more EU funds.

In the long term, this will be disastrous for greaterEuropean cooperation and development ,because

public and inter governmental support will contin-

ue to erode questioning the existence of EuropeanUnion itself.

There should be provision of fines. For any

country if their debt-to-GDP ratio exceeds theMaastricht Treatys 60% limit should pay the fines

or even if their budget deficit exceeds the limit of3% of GDP. The fines could be suitably and reason-

ably decided ranging from the interest premiumwhich country would have to pay in the absence

of help, which will ensure that the benefit of en-

hanced stability under the euro should reached toevery country of European Union.

A Euro crisis can be avoided. Europe should

be ready for facing the high short-term costs ofchanging the rules of its elite and prized union. If

expelling even one member could establish a more

credible mechanism for guaranteeing fiscal disci-pline in the euro zone the price would be more

than worth it helping EU immensely.

It is not too late for Europe to implement

these reforms because solidarity alone will not do

anything. But if Europe cannot do so, then it isbetter to admit failure and be ready to face a highprice in unemployment and human suffering in the

illusion of a economic model which is flawed butwas hailed as visionary.

FIN - Q

APRIL 2011

1. Long Term Equity Antici-Pation Security

2. Chicago Mercantile Ex-change

3. Index futures

4. 1.2%

5. Paul A. Samuelson

6. b,c,d

7. 3.79%

8. 156.75

9. Adjustable Rate Mort-gage

One of the aws is that a

member of the euro zone can-

not be expelled under current

rules



CoverS

tory

IIM ShillongDeep mehta

Osama, Sensex and Scams

What a month it has been! A turely roller coast-er ride for the sensex with no sense of directionwhatsoever! And yes, can we forget THE news storyof the month - Most wanted terrorist Osama Bin

Laden DEAD...finally! Remarkable and inevitable as itmay seem - the impact of this event on world econ-omy is much debated. So, why miss a chance, we atNiveshak would do that too, but in a more holisticand an unbiased way. This event along with Air Indiapilot strike seems to unlock something more dra-matic.Will it? Is the Air India scam something biggerthan the 2G spectrum scam? What about the Sensex?Where will Q4 results lead the markets? Read on...

Part 1 - Osama and the World

10 years. $3 trillion spent on the war on terror.

World economy collapsed twice in the period. Reces-sion - is it still there or are we recovering? Many an-swers for many questions..One thing that concernsall of us is whether US would pull out troups fromwar ravaged Afghanistan. This war has hurt thembadly - widening deficit, lower interest rates thatis fueling world inflation, unemployment and hencelower consumption. Who worries as a result? - Chi-na. Yes, one hand biggest benefeciary of the warhas been China, which had catapaulted to world No.2 while US continues to be sunk in debt, partisan

politics apart from recession.But, they certainly dontwant a bankrupt United States aas demonstrated by$45 billion worth of deals back in January!! Beijingneeds American consumers, the relative security ofAmerican bonds, and the occasional stability provid-ed by American troops. All eyes will be on what arethe next steps o fthe Obamaa d m i n i s -t r a t i o n . .next tar-

get?..next lo-cation..willit be Mid-dle East?W h a t e v e r

be the case..speculations will rise and continue toimpact world economy.

On the day, Osama news were announced,reactions across the world were that of joy . Butworld markets were expected to sky rocket on break-ing of such positive news were rather quite (apartfrom occasional initial spikes). Oil went southward- as expected. But large number of industries needto have a close eye on what the Black gold does.Developments in Middle East is other important re-gion trend for all of us to keep an eye on.

Analyst believed that Osama death would mod-erate terrorism and hence reduce oil uncertainity andhence would send oil prices down. BUt apart fromthe first day after announcement, analysts figueredout that Al-qaeda hardly ever impacted oil supplies.

Result - Oil back up again !! Petrol price hikes in ourcountry also points to a rather Neutral effect of Osa-ma on economy. Inflation continues to be a menacefor the government and with the recent 50bps hike -its getting worse with borrowing cost increasing andpossibilty of firms passing on the cost to end users.This is certainly Osama independent.

Breifly put - we dont think any single Arableader or a slain terrorist mastermind will have anyimpact on world economy. BUt what wedefinitely think is that the following

are Winners emerg- ing from theevent -

1. Obama. O b a m a .Obama !

2. Oil traders - More specu-lation. More profits!

3 .People ofAfghanistan

and Pakistan- drone strikes

w o u l dend . . o rwouldnt

it?

OSAMA

SENSEX

SCAMS

How Good isGOOD for the

markets?


10/200

v

y


and for the losers - many of them :

Pakistan and ISI. Less powerful countries - willUS invade them with their might? \

Most central bankers and WE the common man- as uncertainity almost never ends!

Part 2 - Sensex

Up at the opening bell. Down mid-way in thesession. Immense intra day volatility in the name ofQ4 results, RBI monetary policy, F&O expiry, crudeoil,etc,etc. This is what the month has been like. So,where are we headed? This question puts best ofthe best analyst in an uncomfortable and an em-barrasing situation. Yet, as always, the answer is afilled with ambiguous statements that lead an inves-tor NOWHERE!

The ride of Silver, Gold to all time highs and theretreat that followed adds to the above.

And whats more in store for all of us - Q4 re-sults.

Recap The Ride

BSE sensex was at 19600 levels at the start ofApril after a superb bull run from below 18,000 levelsjust during the third week of March - that is a gainof more than 10% in 10 trading sessions! A correc-tion was inevitable as many went on saying evenwhen the sensex was at 18500 levels and the sameat 19000 levels..but Sensex hardly obeys logic and

rules!But volatility was then to take the lead. The

ride saw BSE falling to just about 19000 levels twicebefore rising again. Next 9 sessions saw the beartake the lead with sensex crashing to 18200 levelswith interest rates rising along with many scams rul-ing the roost. Uncertainity is at its peak. Q4 resultsas a result were badly needed to atleast provide asense of direction to the market.

The Scorecard

What we did notcertainly expect was In-fosys opening the earn-ings results season witha BANG! And what a bangit was - Top managementre-jig in the form of res-ignations, new CEO andchairman - badly affectedsentiments. Reliance In-dustries showed increasein revenues by 26% YoY,better than estimates, but contraction in OPM by242bps due to fall in contribution from oil and gassegment and lower EBIT margins. TCS was betterthan Infy with almost the same OPM qoq and 24%

growth in PAT YoY. A plus for IT sector as a wholewas robust hiring indications by TCS which currentlystand at about 60,000 for FY12.

While SBI results are still pending, banking sec-tor showed good loan growth led by PNB and Bank ofBaroda in public sector. While a positive is a growthin non-interest income a negative remains deterio-rating asset quality. Sensex movement would de-pend a lot on the reactions of these banks to 50bpshike in rates by RBI. But, reactions till now havebeen gloomy for economic growth as most bankshiking loan rates with SBI sending a shockwave byraising rates by 75bps!

HUL showed good set of numbers but a con-cern for most companies in these space remainscompressing margins. Manufacturing growth (cur-rently at 7.5-8%) is likely to be affected due to ris-

ing interest rates and crude oil. Estimates say thatif manufacturing growth falls to 6% then it couldtake off 0.4 points of the GDP. Indias manufacturingoutput contributes about 16% to GDP. Another worryfor the markets continues to be inflation (currentlyat 8.98%). Industry estimates that raw material costsas a proportion of net sales rose to 52.9% in theMarch quarter, the highest in two years, for Indiastop 100 firms. Thus, margins would be under pres-sure. The numbers in turn affecting bottomline andas a result BSE index. Tea, coffee, synthetic fibres,wood products, transport equipment and fuel seg-ments are sectors which face huge pressure in prof-it margins. Companies belong to steel and cementsegment which have sluggish demand also suffer asthey find it tough to raise prices despite a spike inthe prices of raw materials such as petroleum cokeand power.

For Auto, picture is good as shown by Marutivery positive sales growth and strengthening do-

mestic demand.

Having said this,

it seems unlikely that asense of direction can beprovided by mixed set ofnumbers. And thus factorssuch as impending electionresults, company specificreaction to Q4 results anda narrow range for marketsis what is expected. All wecan do is - keep our fingerscrossed and hope for the

best!Part 3 Dhoka : the Hidden Picture!

10 agonizing days, thousands of stranded fli-ers and more than 150 crore LOSS for Air India. Only


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During the pre 90s era, the In-dian G-Sec Market was lagging in ef-ficiency; the interest rates on bondswere mostly administered/fixed bythe government. Against this back-drop, a series of measures were in-troduced to make the market moreefficient.

Post 2001, a series of furtherreforms were introduced whichwere aimed at enhancing the li-

quidity, safety and development ofthe payment infrastructure. Someof the measures taken were estab-lishment of an efficient clearing andsettlement system, introduction ofshort sales and when issued mar-ket, operationalization of NegotiatedDealing System (NDS) and ClearingCorporation of India Ltd (CCIL), al-lowing G-Secs to be traded on stockexchanges, permitting non banks to

participate in the repo market etc.As a result, today debt market

sees an active participation fromvarious players as listed below.

Though all these measureshave helped in improving the G-Secmarket in India, it still lags in certainaspects like restrictions on FIIs forinvesting in G-Secs, lack of exchangetraded interest rate derivatives, lack

of active participation by retail inves-tors in the government bond marketetc. Also State government bondsenjoy less liquidity when comparedto the Central government bondswhich is a cause of concern.

Now if we talk of corporatedebt market in Asian countries, un-like developed countries market, thecorporate bond market is laggingbehind government securities mar-

ket in terms of volume and scale.The size of corporate bond marketis 3.9% of GDP compared to 39.1% ofGDP for the government bond mar-ket. Even this amount is in part dueto the increased investment of for-eign institutions in corporate bondmarket in past 8-10 years. Variousdevelopments have taken place inthe corporate bond sector but stillthe Indian corporate debt market

suffers from illiquidity.Patil Committee, 2005 and Ra-

jan Committee, 2008 were set up tofind the hindrances for corporatedebt market. Their key findings arestated here:

Corporate bond issuers pre-ferred foreign debt through ExternalCommercial Borrowings due to thelow borrowing cost

NMIMS, MumbaiVishisht Dubey

In a country like

India aspiring for

double digit growth,

companies need a

mechanism to raise

funds quickly to fuel

their growth. Having

a well established

government & cor-porate bond market

helps to achieve

these funding re-

quirements. Here,

we look at the state

of the Indian debt

market and suggest

improvements for

the same

Are we debt worthy?Analysis of Indian Debt market

ISSUER INSTRUMENT MATURITY MAJOR INVESTORS

CentralGovernment

Treasury Bills 2-30 years; 91/364days

RBI, Banks, Mutual Funds,PDs

State Gov-ernment

Dated Securities 5-10 years Insurance Companies,Banks, Provident Funds

PSUs Bonds 5-10 years Provident Funds, MutualFunds, Individuals

Corporates Bonds and Debentures,Commercial papers

1-12 years, 15 daysto 1 year for CPs

Banks, Mutual Funds, Cor-porates, Individuals

Table 1: Players in Debt Market

Infrastructure nancing cant

be done with help of equity

capital alone; exploring Debt

markets is the next best option

available

FinSight

2 NIVESHAK VOLUME 4 ISSUE 3 mARCH 2011


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Companies prefer loans to bond issuancedue to mark to market requirement in bonds

Government regulations set an upper limitfor foreign institutions in corporate bond investment

Insurance companies and mutual funds arenot allowed to hold certain assets in their portfolio

thereby eliminating them from the corporate bondmarket

Need for an amendment to the bankruptcycode so as to protect the creditors in case of a crisis

Low demand due to few institutional inves-tors and less number of quality issuers is hinderingthe development of a healthy corporate bond market

From the above analysis we have seen that thegovernment securities market is relatively better de-veloped than the corporate bond market but thereis a scope for improvement in both the sectors. This

will ultimately improve the Indian debt market andsupport Indias growth.

Recent trends show that some investors pre-fer debt markets to equity markets to protect themagainst volatility in equity markets. Government andCorporate houses are increasingly becoming moreinterested in the Debt markets because of increas-ing investment in Infrastructure development. Tomaintain the 8% plus growth rate, Indian Economyhas to heavily invest in Infrastructure. Investment inInfrastructure sector is targeted at Rs. 41 lakh crore

in the 12th Five Year Plan. This means an investmentof about US$200 bln per year from 2012 onwards. Incomparison, FDI inflows were US$ 7 bln into Infra-structure sector in 2010. Clearly it can be seen thatall the infrastructure financing cant be done withhelp of equity capital alone. So exploring Debt mar-kets is the next best option available.

Constraints in the Development of Debt

Markets in India

Firstly the ceiling on the foreign investmentin both government and corporate bond markets islimiting the market volume. Current limit is $5 billionfor government securities and $20 billion for corpo-rate bonds. These limits need to be revised but atthe same time the financial stability should also beconsidered in terms of capital account convertibility.Absence of foreign denominated sovereign bonds isalso responsible for the interest of foreign investorsin equity market rather than debt.

Secondly, in developed bond markets like inUSA, around 25-30% volume is captured by feder-al agencies securities, municipal agency and assetbacked securities. In India according to 12th financecommission the state governments would now notbe looking to central government for funds. Theywould be going directly to the market. Apart from

this as municipal agencies develop and expand theywould also feel the need to enter the debt market.

Currently, most of the Interest rate derivativeslike Forward Rate Agreements (FRAs) and Inter-est Rate Swaps are traded Over the Counter (OTC).Though there has been significant increase in thenumber of contracts, participation in this market re-mains restricted to a few foreign and private banks.The introduction of exchange traded derivatives isexpected to improve the interest rate derivativesmarket in India. In connection with this, it is neces-

sary to ensure that efficient risk management prac-tises are followed by the market participants andmore transparency should be bought in OTC marketto prevent any catastrophe like the one recently en-countered by the western world.

Another issue of concern which has beenraised in various corners is the conflict of interestinherent in RBIs role as both the monetary policymanager and the intermediary for government debtmanagement. For e.g., certain monetary tools likeSLR will affect the cost of borrowing by governments.

But as RBI has been effective in both these roles inthe past, we believe it is too early to separate theGovernment debt management role from the RBI,though more transparency can be bought in this re-gard.

Thus on a concluding note, Indian debt mar-kets has come a long way since the economic re-forms which were initiated in 1991. Even though thereforms in G-Sec market have been impressive, cor-porate debt market still lags behind when comparedto the developed nations. Since equity capital alone

is not sufficient to fund the bullish expansion plansof all the companies in India, a lack of funding is oneof the major constraints hindering our progress. Anefficient corporate debt market is thus very essentialfor sustaining Indias growth engine.

FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 13

FinSight

The corporate bond market

is lagging behind government

securities market in terms of

volume and scale


14/20

..

The reasons for a

large part of the

population to stay

outside the realms

of banking vary from

logistics to cost of

transactions, lack of

financial literacy and

products that meetthe requirements of

the unbanked. The

importance of SHGs

(Self Help Group)

and microfinance

becomes all the

more important, to

save these people

from hungry money-lenders. With more

than 4 crore house-

holds being pro-

vided credit through

SHGs, this model

acts as a great step

towards Banking

the Unbanked and

can be one of thebiggest contribu-

tors towards Indias

growth in the com-

ing decades.

fully. In the 1980s, policymakers

took notice and worked with devel-opment organizations and bankers

to discuss the possibility of promot-

ing these savings and credit groups.State governments established re-

volving loan funds which were usedto fund SHGs. By the 1990s, SHGs

were viewed by state governmentsand NGOs to be more than just a

financial intermediation but as acommon interest group, working on

other concerns as well. The agenda

of SHGs included social and politicalissues as well.

The SHGs became a regu-

lar component of

the Indian finan-cial system since

1996. The SHGsare small, infor-

mal and homog-enous groups.

These groups haveproved as cyclic

agents of develop-ment in both the rural and urban

areas. The SHGs after being formed

start collecting a fixed amount ofthrift from each member regularly.

After accumulating a reasonable

amount of resource, the groupstarts lending to its members forpetty consumption needs. Later,

as the group stabilizes it is linkedwith a bank for serving greater

loan needs. If the bank is satisfied

with the group in terms of genu-ineness of demand for credit, credit

488 districts in all the states/

UTs have been covered under

SHG Bank Linkage Program

(SBLP) program me

SHG M ode l f or m icr of in an ce

NIVESHAK VOLUME 4 ISSUE 4 April 20114

Xavier Institute of Management, BhubaneswarGopal Kumar Singh & Rahul Sachdev

pMicro-finance institutions are

well-recognized world over as aneffective tool for poverty alleviation

and improving socioeconomic sta-

tus of rural poor. In India too, mi-cro-finance is making headway in

its effort for reducing poverty andempowering rural women. Micro-

finance works through the networkof cooperatives, commercial banks,

regional rural banks, NABARD andNGOs and is largely supply-driven.

Villages are facing problemsrelated to poverty illiteracy, lack

of skills, health care etc. These areproblems that cannot be tackled

individually but

can be bettersolved through

group efforts.Today these

groups knownas Self Help

Groups (SHGs)have become

the vehicle ofchange for the poor and marginal-

ized. Self help group is a method of

organizing the poor people and themarginalized to come together to

solve their individual problems. The

SHG method is used by the govern-ment, NGOs and others worldwide.

Emergence of the SHG Move-

ment

In the early stages, NGOsplayed a pivotal role in developing

the SHG model and in implementing

the model to develop the process


15/20


16/206 NIVESHAK VOLUME 4 ISSUE 5 May 2011

p

At the cluster and federation level, there are

inter-group borrowings, exchange of ideas, sharing

of costs and discussion of common interests. Thereare typically various subcommittees that deal with

a variety of issues including loan collections, ac-counting and social issues.

There are certain models recognized by theRBI in delivering of credit through SHG and microfi-

nance linkage. The RBI also, monitors the successof SHGs in the view of model wise disbursement of

loan. The models are termed as Model I, Model IIand Model III.

Model I suggests extending credit facilitiesby public sector banks directly to SHGs without in-

tervention/facilitation of any NGO. This model ac-counts for 16% of the total loan disbursement to

the SHGs.

Model II suggests giving credit directly to

SHGs with facilitation by NGOs and other formalagencies. This model is currently most famous and

widely used model as it accounts for 75% of theloan disbursed to the SHGs.

Model III suggests extending financial linkagethrough NGO as facilitator and financing agency.

This represents only 9% of the total linkage.

While 488 districts in all the states/UTs havebeen covered under SHG Bank Linkage Program

(SBLP) programme, 444 banks including 44 com-mercial banks (including 17 in the privatesector), 191 RRBs and 209 co-operative

banks along with 2,155 NGOs are now deliv-ering credit to the poor and marginalised

by way of using either of the abovementioned models via SHG model.

Keeping these validated mod-els for delivery of credit to the poor

and the unorganized sector inview, RBI is moving towards

a systems perspective forproviding effective policy

support not only becausea number of different in-

stitutions, viz. banks,

MFIs, NGOs & SHGs areinvolved, but also be-

cause these institutions have very different institu-

tional goals. With this in view, a series of initiatives

is being planned in the coming months for puttingin place a more vibrant micro finance dispensation

environment in the country where complementaryand competitive models of micro finance delivery

would be encouraged to co-exist.

However, some experts also view the success

of SHGs in delivering financial inclusion to the poor-est of the poor with a pinch of salt. According to

them, the outreach of SHG-bank linkage may seemimpressive, but in the context of the magnitude of

poverty in India and the flow of funds for povertyalleviation, it represents a very small intervention.

Thus, the SHG model for providing micro-fi-nance in India has been, to a large extent, a very

successful initiative. Currently as well, there are a

number of initiatives being taken up and huge sup-port is being rendered to these SHGs. Many SHGsin Andhra Pradesh are flourishing after taking up

micro-finance initiatives. Hence, we feel that thismodel can further be explored and taken up by

various other groups across the country.

Micro-nance works through the network of cooperatives, commercial banks, regional rural banks,

NABARD and NGOs and is largely supply-driven



Welcome students! Today well talkabout Exchange traded Funds (ETFs). So, hasanyone heard about it until now?

Sir, I just know that it is similar tostocks and mutual funds that can be tradedon stock exchanges.

Well, you are correct, but lets just de-fine it once again. EFT is defined as a secu-rity that tracks an index, a commodity ora basket of assets like an index fund but

trades like a stock on an exchange. ETF are often calledas index shares, are a hybrid of index mutual fundsand stocks

What is the process for issuance ofETF?

The issuance of EFT is just like a pri-mary market IPO or a mutual Fund NFO.Shares are issued by the Fund manager andlisted on the exchanges. Investors can buyand sell these shares from the secondary

market through their brokers.

What is so special about ETFs? Whatbenefits does it offer?

Good question. The beauty of ETFs liesin the fact that it offers investors the abilityto diversify over an entire sector or marketsegment in just a single investment. ETFsare special because they are diversifiable

like mutual funds and also can be tradedlike stocks. Mutual funds cannot be traded each daylike a stock. Further, ETFs involve low cost, offer trans-parency and multiple strategies can be applied whiletrading.

Classroom

Sir, u just mentioned one differencebetween mutual funds and ETFs. Is thatthe only difference?

Good that you asked because it isimportant to know. Trading in ETF takesplace on the stock exchanges during trad-ing hours. The mutual fund units are how-ever purchased from the Mutual Fund at

NAV at the end of the day. The expenses are low inan ETF since there is no active fund managementinvolved as in case of mutual funds. The costs inmutual funds are higher in short term since they aresubject to load fees, annual management fees, exit

fees etc. Dividends are rarely made in EFT whereasthere are frequent dividends made depending uponthe stocks the mutual fund is holding.

Sir, What are the different types ofETFs available?

Oh. There are many!! Broadly ETFscan be classified into Global ETFs, FixedIncome ETFs, Commodity ETFs, CurrencyETFs. We can discuss about all these indetail later. FYKI, there are ETFs focussing

on entire countries too!!

How popular is ETF in India?

Hmmm. ETF is not a new con-cept in India. There have been two ETFslaunched in India one is based on Sensexwhich was called Spice and another waslaunched with Nifty as an underlying as-

set, it was gold Nifty Bees. However both these in-struments failed to attract the attention of investors.ETFs are regulated by SEBI in India.

CLASSROOM

FinFundaof theMonth

Exchangetraded

fundsTeam Niveshak

Sawan singamsetty


18/208 NIVESHAK VOLUME 4 ISSUE 5 May 2011

FinLounge

All entries should be mailed at [email protected] by 12th June, 2011 23:59 hrs

One lucky winner will receive cash prize of Rs. 500/-

F I N - Q

1. He is the youngest-ever financial editor of Forbes magazine and could beconsidered as Father of Science of Technical Analysis. Identify the person.

2. A Trend Is More Likely to Continue than reverse is the basic tenets ofwhich famous theory?

3. Unleveraged Cash Flow is better known as ______________. Name the term.

4. A legal process to pay the creditors of a corporation declared to be insolventis known as____________

5. If there is no corporate income tax, cash flow depends on the depreciationpolicy .True or False? Explain in one line.

6. If there is no corporate income tax, the leverage effect of debt does not ex-ist. True or False?

7. Which two person are founder of the Dow Jones Industrial Average?

8. Name the index which used to detect the Bullish or Bearish trend in stockmarket?

9. What does Chalu Upla mean in stock trading?

10. Which is the first foreign company listed on NYSE?


19/20

A N N O U N C E M E N T SARTICLE OF THE MONTH

The Article of the Month winner for April 2011 arePranay Singh

of FMS Delhi

They receive a cash prize of Rs.1000/-

FinQ WinnerThe FinQ Winner for the month April 2011 is

Pooja Beria

of IIM Raipur

She receives a cash prize of Rs.500/-CONGRATULATIONS!!

ALL ARE INVITEDTeam Niveshak invite articles from B-Schools all across India. We are lookingfor original articles related to finance & economics. Students can also contrib-ute puzzles and jokes related to finance & economics. References should becited wherever necessary. The best article will be featured as the Article of theMonth and would be awarded cash prize of Rs.1000/-

Instructions Please email your article with the file name and the subject as __ by 12 June 2011. Article must be sent in Microsoft Word Document (doc/docx), Font: Times New

Roman, Font Size: 12, Line spacing: 1.5 Please ensure that the entire document has a wordcount between 1200 - 1500 The cover page of the article should only contain the Title of the Article, the

Authors Name and the Institutes Name Mention your e-mail id/ blog if you want the readers to contact you for furtherdiscussion Also certain entries which could not make the cut to the Niveshak will get

figured on our Blog in the Specials section

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